chapter 22 - business finance needs & sources

Question 1

roles of finance department

Answer 1

• record all financial transitions
• prepare final accounts
• produce accounting information for managers
• forecasting cash flows
• make important financial decisions

Question 2

why do business need finance?

Answer 2

• start a business (rent, buy nca, overheads)
• expand a business (buy fixed asset or fund a takeover)
• capital expenditure and revenue expenditure
• pay overhead costs

Question 3

ways to obtain finance

Answer 3

• internal sources or finance

- external sources of finance

Question 4

types of internal sources of finance

Answer 4

• sales of inventories
• sales of existing assets
• owner’s capital
• retained profit

Question 5

definition of:

internal finance

Answer 5

obtained from within the business itself

Question 6

definition of:

external finance

Answer 6

obtained from sources outside of and separate from business

Question 7

advantages of owner’s savings

Answer 7

• available to business quickly

- no interest is paid

Question 8

disadvantages of owner’s savings

Answer 8

• may not be enough/ too low

- increases risks, owners have unlimited liability

Question 9

advantages of retained profit

Answer 9

• don’t have to be repaid

- no interest paid, doesn’t increase expense of business

Question 10

disadvantages of retained profit

Answer 10

• reduce payment to shareholders, thus reduce investment in business
• not enough for expansion
• new firms may have much

Question 11

advantages of sales of inventories

Answer 11

-reduce storage cost

Question 12

disadvantages of sales of inventories

Answer 12

-might disappoint customers if not enough stock

Question 13

advantages of sales of existing assets

Answer 13

• makes better use of capital tied up

- doesn’t increase debts

Question 14

disadvantages of sales of existing assets

Answer 14

• takes time, money not available immediately

- new firms have no assets to sell

Question 15

types of external sources of finance

Answer 15

• issue of shares
• selling debentures
• factoring of debts
• bank loans
• grants and subsidies
• crowdfunding
• micro finance

Question 16

advantages and disadvantages of issue of shares

Answer 16

• no need to be repaid
• no interest charge
• dividends have to be paid
• ownership of business change hands to majority shareholders

Question 17

advantages and disadvantages of bank loans

Answer 17

• quick and easy to arrange
• variable lengths of time
• lower rates offered if business borrow large sums
• repaid with interests
• collateral required as security

Question 18

advantages and disadvantages of selling debenture

Answer 18

• raise long term loan
• no collateral required

-repaid with interest for long term

Question 19

advantages and disadvantages of factoring of debts

Answer 19

• immediate cash obtained
• collecting of debts done by factors

-doesn’t receive 100% of value of debts

Question 20

advantages and disadvantages of grants and subsidies

Answer 20

• doesn’t have to be repaid

- accept conditions - locate in high unemployment area

Question 21

definition of:

micro finance

Answer 21

financial institutions set up in poorly developed countries to help financially lacking people to start up business

Question 22

explain micro finance

Answer 22

bank won’t lend bcs they don’t have collateral to offer as security and they only borrow low amount, bank can’t make profit

Question 23

definition of:

crowdfunding

Answer 23

funding a project or venture by raising money from large num of people who each contribute a relatively small amount, typically via internet

Question 24

advantages of crowdfunding

Answer 24

• no initial fees payable to crowdfunding
• allow public’s reaction to new’s business venture to be tested
• fast way to raise sums

Question 25

disadvantages of crowdfunding

Answer 25

• ideas might be stolen
• media interest and publicity need to be generate to increase chance of success
• total amount required not raised, finance promised need to be repaid